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Einhorn vs. the Apple Goliath (Update1)

Written by: Chris Ciaccia02/07/13 - 3:23 PM EST

Tickers in this article:
AAPL

(Updated from 9:58 a.m. EST to provide CalPERS comments regarding the vote in the 10th paragraph.)

NEW YORK ( TheStreet) --
Apple (AAPL) has had plenty of fights on its hands over the years. Now it looks like one of its biggest supporters is turning against the tech titan.

Hedge fund manager David Einhorn has been a noted Apple bull in the past, but now he's asking shareholders to fight against the company. He's put out a letter asking shareholders to vote against Apple's proposal to do away with preferred stock, which he says restricts "the Board's ability to unlock the value on Apple's balance sheet."

Einhorn first mentioned this topic in May 2012 at an investment conference . He gave a solution that could eventually cause Apple to rise 62% (from May prices), where the company would offer perpetual preferred stock at a dividend rate of 4% to 6%.

"We believe Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders," said the Greenlight Capital president in the letter. "Over the past several months, we have had an ongoing dialogue with Apple regarding one option to do so, namely the creation of a new security, a perpetual preferred stock that would be distributed at no cost to Apple's existing shareholders, and would provide an attractive, sustainable dividend while preserving Apple's financial resources to pursue its business strategy."

Einhorn took to CNBC this morning to further push his case. "Apple has gone through a couple traumas," he said. "It has a mentality of depression. Apple seems to feel like it can never have enough cash. We've come up with a solution where Apple can maintain its cash, and at the same time, shareholders can reap the value of its balance sheet."

"We own more Apple today than we ever have," Einhorn said when asked if he still has a large position in the tech giant. Einhorn's most recent 13F showed that he trimmed some of his Apple stake , but a recent investor letter noted that Einhorn and his fund "used the lower prices as an opportunity to repurchase the shares we sold in the third quarter."

Apple shares have vastly underperformed in recent months, falling 26.5% over the past six months for a variety of reasons. Einhorn is trying to reinvigorate Apple's share price with this maneuver.
AAPL data by YCharts

When I first heard this case made in May, I thought it was a creative idea, but just an idea. I agree with Einhorn that Apple's management, led by CEO Tim Cook, CFO Peter Oppenheimer and Treasurer Gary Wipfler, are conservative when it comes to cash, a stance which may stem from the near bankruptcy Apple experienced in the late 1990s. I just don't think Apple will cave to Einhorn's activism here.